New Vanguard Global Stock Index Fund and ETF

Vanguard just announced that they will be offering a global stock index fund and global stock exchange traded fund (ETF) in the second quarter of 2008.

They will track the FTSE All-World Index which measures the performance of large- and mid-cap stocks worldwide according to their market capitalization weighting.

The fund will be approximately 45% U.S. securities and 55% non-U.S securities.

Global Stock Index fund and Global Stock ETF fees

The fees are 0.45% for the index fund (available to American investors only) and 0.25% for the ETF which is available to Canadians through your discount broker. I think the ETF fee of 0.25% is a bit high considering that you can buy the American stock ETF with a mer of 0.07% and VEU which is Europe and Asia – mer is 0.25%. If you were to buy those two ETFs for your portfolio – let’s say 50/50 then the mer would be 0.16% plus extra trading fees. The new ETF is definitely more convenient however.

No small cap

One of the drawbacks of this index is that it only includes mid-cap and large-cap companies so there is no representation of small cap companies. According to the FTSE site, this setup encompasses 98% of the world capitalization so you could make a pretty good argument that the small cap companies don’t matter. A lot of investors such as William Bernstein (author of the Four Pillars of Investing) himself believe that small caps will outperform larger companies mainly because they have a higher risk profile and have done so in the past. Personally I’m skeptical because the “small cap will outperform” thing has been so well documented that I don’t believe they still have an advantage.

Home country bias

It’s been well documented that most passive investors will over-weight their home country when planning their equity asset allocation. There are a lot of reasons – familiarity, currency risk are perfectly valid reasons for having more familiar equities in your portfolio. For Americans, those reasons are not all that valid because their equities make up such a large part of the all-world index that they can diversify abroad and have their home-cooked equities as well. Canadians and other small countries can’t do this – in the case of Canada, the market capitalization share is only 3% so to have the proper weighting, a Canadian would have to have almost no equities in their home currency which might not be a great idea for someone who is in retirement and wants to maintain a high percentage of equities. As I discussed, the Canadian index is not just small, it’s not very diversified either which is a common situation for smaller countries.

Should you buy the new global stock ETF?

I think if you are a passive investor and want to cut down on the number of securities that you own then this ETF is worth looking at. Unfortunately, a lot of investors will probably want to buy at least one more ETF to add small cap companies and to increase their home country investing.

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I shouldn’t even join conversations about the stock market because I don’t know a whole lot. I do know I own FTSE All World Excluding US. While I live here, I don’t believe it’s the place to be biased toward in my investing right now.

Hi Emily, knowledge is definitely NOT a requirement around here for writing comments (and posts as well).

As a fairly passive investor I don’t even try to make predictions about whether any particular market is a good buy or not. Personally I don’t think the outlook for the US is all that bad, in fact I will be buying more when I rebalance my account.

A lot of investors tend to sell their equities/stocks when things are “not looking to good” (ie sell low) and then buy once things “look good again” (ie buy higher) which is not a path to success.

That said, most Americans probably don’t have enough foreign equities so although right now might not be the ideal time to switch to foreign (the ideal time was probably several years ago), more diversification is not a bad thing.

Home country bias is something to mindful of in Canada for the reason you mentioned (3% of world market cap, and our market is not well diversified) – and there is another big reason for it as well: taxes. The dividend tax credit is only available against dividends paid by Canadian stocks.

I always love the idea of “bundles of bundles” where mutual funds or etfs buy other mutual funds or etfs, but the compounding of fees sucks. You’re right, why pay .25% when you can put the same thing together yourself for .16%?

I think I believe Bernstein with the small cap advantage. They have higher volatility, so short term investors will shy away from them and the returns will match the risk. Kind of like equities vs. bonds, you accept short term volatility for a higher long term return. That being said, I don’t own any small caps, so I certainly haven’t put my money where my mouth is ;-).

WDAMMG – very good point about the dividend credit for Canadian dividends.

Cheap – very true. With the global ETF, you would cut your trading fees in half but if you have a significant amount of money then higher mer makes up for the reduction of trades. And of course if you have less money then the index fund is a better choice. Maybe I should do a etf vs index fund post?? Oh wait, I’ve already done 12!!

I’ve been waiting for this fund for years. While I prefer to slice-and-dice in my tax-sheltered accounts, this fund would be an ideal way to minimize taxes in a taxable account. This fund will probably be even more tax-efficient than holding the Vanguard Total US Stock Market fund and the FTSE All-World Ex USA fund in the same proportions, which is what I currently do.

Mike, no need to sell one fund or another to rebalance. I guess if your balance is fairly small, you could always just rebalance by directing new contributions to the appropriate place, but once you get a sizeable account going, the tax consequences of rebalancing in a taxable account can be significant. At least in the US. I don’t know how Canadian taxes work.

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I do not know how well the WORLD ETF is diversified. I would love to see an ETF that is comprised of ALL countries in the world that have a stock exchange where there are at least 20 securities that trade every day. Other than that most world ETF’s consist of many European shares, some Japan stocks and the rest is left to large countries like China, Australia, Brazil etc. But, we might be missing on the “next big thing” over the next decades to 100 years.

DGI – I’d rather have an ETF that contained every security but the management fees would probably be higher as well.

I’m not too concerned about missing the ‘next big thing’ – if a stock or group of stocks in the excluded portion do well, then they will end up in the index before they get too big, so you will be able to benefit from them.